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Playing leapfrog

18 May 2017

Money is set to skip a generation, as families act to counter the unequal spread of wealth between young and old.

Over £400 billion in wealth being held by Britain’s grandparents is set to cascade down to the benefit of grandchildren in the coming years, according to a new report from Royal London1. The data was collected by YouGov, which surveyed over 5,000 people from three generations2. As well as highlighting the vast wealth inequality between generations, the report also reveals a significant difference in the ways different age groups think about giving or receiving an inheritance.

An overwhelming majority of those aged 25–44 want to see their parents and grandparents spending freely and enjoying their retirement. This is a powerful challenge to the idea of a generation of ‘millennials’ resenting the lifestyles of older generations.

But older generations, the report finds, are much more focused on preserving their wealth with the aim of passing it on. Grandparents, in particular, have a strong desire to leave an inheritance, especially to their children but also to their grandchildren.

The report notes that the people most likely to inherit housing are those with elderly parents, and are therefore usually middle-aged themselves. For this reason, they are likely already to possess their own housing wealth and be aware of the challenges facing their own children.

A majority of this group, particularly those aged 55–64, are therefore planning to pass some or all of any inheritance straight on to the next generation. Whilst they are less ideologically wedded to the precept of leaving a significant inheritance, the report claims that “they clearly feel under pressure to do so and plan to do so”.

“There is a wall of housing wealth set to cascade through the generations in the coming years,” according to Steve Webb, policy director of Royal London.

“Grandparents still attach great importance to passing on their wealth rather than consuming it. Many in the next generation feel under considerable pressure to pass any inheritance straight on to their own children as they are acutely aware of the challenges faced by their millennial offspring,” says Webb.

A friend indeed

To address the challenge of distributing wealth more appropriately within the family, some beneficiaries will choose, or are obliged, to make posthumous changes to the Wills of deceased family members using a ‘deed of variation’. However, the potential complications and upset involved mean it should very much be viewed as a last resort.

Better lifetime planning can prevent such problems; indeed, transfers of wealth between the generations do not only happen after death. Parents and grandparents with the financial means are increasingly considering transferring assets to children within their own lifetimes – and while they still have the opportunity to see those recipients benefit. This may be to help them gain a foothold on the housing ladder, to clear debts, or to build a fund for retirement.

The report shows that roughly two thirds of 65–74-year-olds had given a lump sum gift to their children; the gift was often intended for a specific purpose – a house purchase, other large purchase or special occasion came at the top of the list. One third of those aged 75 or over had given lump sums directly to their grandchildren; this was often earmarked to pay for education, but it may also reflect an element of Inheritance Tax planning by the donor.

It is clear that the UK is entering an unprecedented era in which people are retiring with much greater wealth than their predecessors. That wealth is largely being preserved through retirement and will in due course find its way down through the generations. It therefore makes sense for more individuals to consider estate planning as part their overall financial planning strategy.

Making a Will can help minimise tax and ensure your estate is passed on in line with your wishes. However, there are a range of additional measures you can take while you are still alive to pass wealth on and minimise liability to Inheritance Tax.

With the benefit of advice, you can ensure that your wealth goes to whom you intend, without putting your own retirement security at risk.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place and are not regulated by the Financial Conduct Authority.

1 Royal London Policy Paper 12, Will harassed ‘baby boomers’ rescue Generation Rent? April 2017.2 YouGov conducted interviews between 1st February and 8th February 2017.

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Although the content of the article(s) archived were correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.